Full speech by Mr. Herman Van Rompuy, President emeritus European Council and President of the Advisory Board of TomorrowLab during our online round table in June 2020.
The corona crisis is one of the most bizarre and at the same time one of the most dramatic we have experienced since the war.
Many ask me what the difference is between the eurozone crisis and the current corona crisis. One was about the life and death of our currency and perhaps the Union as well. Today, it is about people's lives and deaths. Of course, ten years ago it was also about people indirectly - their jobs and living standard -, but now it is very direct. This pandemic has also changed our daily lives in a way we never took into account until it happened. I don't know if it will have lasting consequences on our 'way of life' and if we are facing a structural break in the economy and society. The period of three months was probably too short for that. But the virus has not yet been definitively contained.
In any case, certainly at the beginning of the crisis, there was a sense of solidarity. We are in the same boat. There was a strong discipline to abide by the strict rules also because people were afraid. We were scared for a reason. Worldwide, there are 450,000 deaths as a result of the pandemic. In Belgium almost 10,000. Without lock downs and other measures, there would be ten times more casualties. That fear also brought distrust among people: your neighbour was a candidate infector! Solidarity and distrust seldom go together, but here it was.
Politicians had to work closely with the experts, another unusual phenomenon. The politicians who knew better made a dramatic mistake. Look at the UK and the US. It's also a lesson in modesty for politics.
This crisis was not manmade. On the contrary, but one cannot ignore the fact that some countries did much better than others within the Union and worldwide.
The corona crisis has once again exacerbated the inequalities in the world as they have grown within each of the countries. Some people were better protected against the virus than others. Dramatically increased unemployment plays a major role. If these inequalities come on top of other discrimination and injustices, this has already led to socially explosive developments in the US and elsewhere.
The lockdown has also exacerbated inequality across workers, with those able to telework generally highly qualified, while the least qualified and youth are often on the front line, unable to work or laid off.
Fortunately, people were often cared for in the same way within most European countries, at least that was the case in my country. However, we now know that we need to invest even more in health care, especially for the very elderly where most of the victims occurred.
We now also know that in addition to physical health, there is also mental health. Loneliness is an illness. Fortunately, the digital world has made contacts possible that did not exist fifteen years ago. Imagine a crisis like this without the new technology! The loneliness would have been much greater, and the economic damage and loss of jobs would have been much bigger.
But the health crisis is not over, nor is the economic depression. All virologists assume that there will be a so-called second wave in the autumn. The only question is when exactly, how big and how we will dampen the wave. The virus hasn't lost any of its power. It's just because we had fewer contacts that there were fewer infections. As soon as they resume in an unsafe manner, the pandemic returns. We now also know that a few people can cause an exponential resurgence. By the way, I note that the story of the Spanish flu one hundred years ago teaches that the countries that reopen quickly are hit harder also economically afterwards. A definitive solution will only come when an adequate vaccine is available for everyone. Hope is allowed because the effort of the private and public sector worldwide is huge. Under a new vaccine strategy, the Commission is proposing to help companies pay for the development of potential vaccines. The plan would see the Commission use EU funds to purchase vaccines before the shot has completed testing and is approved for use, in exchange for guaranteed supplies if it works.
But at least until deep into 2021, we will have to live with this virus. Until then, there will be uncertainty among citizens, consumers and investors. There was already uncertainty, fear and anxiety in our society about a range of causes. Think of migration, terrorism, debts, jobs in a digital world, climate, etc. All this is now coming to a climax. We will live during some time in ‘the economy of fear’.
Initially, many hoped that, since the crisis was a one-off accident, the suffering would soon be forgotten and that we would have a kind of V recovery where next year's damage in terms of economic growth would already be made good and that budget deficits would fall drastically by themselves. There was a V recovery on the stock market but there is a disconnect with the real economy. Nobody believes or hopes that quick recovery anymore. One of the reasons is that consumers and investors do not yet have confidence in the end of the pandemic. It does not help to increase global purchasing power because it may be feared that the propensity to save may increase by half. For social reasons one must protect the purchasing power of the most vulnerable in society, but a relaunch by a general increase in incomes is pointless, precisely because there are and will be great precautionary saving. The Belgian central bank notes that households' disposable income will not decrease in 2020. Again, only a vaccine will dispel that fear. A V movement is also not possible because we are only at the beginning of the economic damage to companies. Some were temporarily kept alive by government measures, but that is not enough for quite a few. The companies that were already in dire straits before the corona crisis and were dragging on a high level of debt will not be able to make it in the event of too slow a recovery. The government can't save everyone. The OECD said that "those sectors affected by border closures and those requiring close personal contact, such as tourism, travel, entertainment, restaurants and accommodation will not resume as before. This will affect potential economic growth in the coming years.
The World Bank said that this global downturn will be the fourth most severe in the last 150 years. According the OECD: “By the end of 2021, the loss of income exceeds that of any previous recession over the last 100 years outside wartime.”
Politics in Europe did not respond with austerity as in the 1930s and as in the eurozone crisis. On the contrary, deficit spending is driving governments to gigantic deficits, both because of the automatic increase in expenditure and automatic decrease in revenue as a result of the depression, but there were also voluntary, discretionary measures. Governments attempted to stabilise the labour market through a variety of systems of temporary unemployment, through other support measures such as state guarantees to companies, sometimes to sectors. Usually this was to avoid too deep a slippage or to prevent permanent damage to people and companies. In addition, national governments and the EU are setting up investment programmes to make the recovery more sustainable. The EU and member states collectively mobilised over €3.4 trillion to tackle the coronavirus outbreak and its economic impact, representing 25% of the EU's GDP, which was described as "an enormous, historic response". That investment programme may not be the way out of the crisis quickly. Before investments can be made concrete, numerous logistic and administrative steps have to be taken which cause delays (time lags). Many of the planned investments really come on stream when the worst of the recession is already behind us.
This expansionary fiscal policy was flanked by an exuberant monetary policy with an unprecedented increase in the money supply and low, even negative, interest rates. To give you an idea of how historically low interest rates are: last month the governor of the Bank of England said negative rates were "under active review" for the first time in the Bank's 324-year history. The ECB and the FRB will maintain this policy for at least another two years. All hands-on deck.
I repeat: the political answer was the opposite of what was done ten years ago. Policymakers were politically aware that in the current circumstances’ austerity would only play to the advantage of populists and extremists.
High budget deficits and the sharply increased public debt will sooner or later have to be reduced. Economic growth and low interest rates will help. But there will be a gap to cover. This hasn’t to happen suddenly. In any case the injection of public money cannot have a permanent character.
For a relatively small economy such as the Belgian one, one should be well aware that economic recovery depends on two factors: the restoration of confidence in the containment of the virus and the recovery at European level. These are two elements over which the governments in the country have little control. A federal investment programme is hardly possible because a large part of the public investments are made at the regional and local level. In terms of private investment, it is possible to strengthen the financial structure of companies affected by the high level of debt. However, for investments much depends on demand at home and abroad, and on confidence in the future. That aspect of trust keeps returning. A Belgian relaunch has also to take into account that a large part of the effect, leaks away to imports and to savings, both deflationary.
Where a relaunch must be different not only quantitatively but also qualitatively is that sustainability must now be a priority. The European Commission rightly says that the major priorities of its policy prior to the corona crisis, must be maintained: the Green Deal to make the EU carbon neutral by 2050 and the digital transformation in all areas. In the first area the EU can play a leading role globally, in the second it is important to reduce and eliminate our gap with China and America. The time is past when climate and economy are contradictory. On the contrary, there are enormous opportunities in the future. It's about our competitiveness, as is of course the case with the digital revolution.
We need to invest even more in research and innovation at all levels of governance. A significant increase was foreseen in the European budget 2021-2027. An effort has also been made in Flanders in recent years. That has to be done. In the midst of a crisis that overwhelms us, we must continue to think about the longer term instead of spending scarce resources (despite deficit spending) on VAT reductions or popular fiscal and social gifts.
I apologise that the story is not rosy, but I must add that we hope that the eurozone remains stable. The ECB's action is helping the weaker countries very strongly but, if the Franco-German fiscal recovery plan, complemented by the Commission, is not accepted, the euro area will once again face an extremely serious moment. Merkel and Macron have set aside taboos precisely to keep financial markets' confidence in the euro, stable. A number of so-called northern countries have not learned much from this crisis and are still telling the stories of the past. It is the countries that have benefited most from the euro and the single market that now threaten to create a major problem. The big exception is Germany. It is very characteristic that the debate in Germany on aid to southern countries is now proceeding differently from ten years ago. The country itself has given up many taboos internally, such as the budget balance at all costs and state guarantees to companies. Germany accounts for half of state guarantees in the EU. In short, it is another moment of truth in the EU.
The globalisation of illness started with this pandemic, following the globalisation of economies, music, sport, migration, digital platforms and others. This crisis has also subjected the world to the same regime. Everywhere you see mouth masks, lock downs, testing, tracing, economic damage and job loss. We were and still are in the same boat. That does not mean that we feel together.
Among the major economic players, China, the USA and the EU in particular, there is distrust. This is also the case in relations of Western countries with Russia. This lack of trust also exists within the Western camp and also within Asia.
We must not forget that the period prior to the corona crisis was already an ordeal for the world economy. The trade war between China and the US, which was far from resolved, could even continue, if only because the relationship with China is a theme in the presidential campaign. It is a pointless war, all the more so because it also damages the American economy. China needs to review a number of trade and investment practices, but a tariff war will not bring a solution any closer.
Mutual rivalries, nostalgic nationalism and attempts of destabilisation via cyberspace play a major role here. The corona crisis has increased the ‘global distancing’ between these global actors even further. This didn’t give rise to new potential military conflicts, but it is an obstacle to jointly tackle the major problems of our time, such as climate change, inequalities and economic prosperity. All this at a time when, rationally speaking, international cooperation is more necessary than ever.
Besides, there's Brexit. We are heading for a hard exit from the single market with the introduction of customs controls and tariffs from 1 January 2021, in the midst of the corona crisis. It is literally incomprehensible and anti-economic. Even though the damage here will again hit the British themselves, the impact in a number of Western European countries will not help the recovery. The consequences of populist policies on health and economy are great and a real weakening for the West.
Having said this, the situation in the Anglo-Saxon world is also very serious. The UK has had the largest collapse in three hundred years and one of the highest numbers of corona deaths, relatively speaking, in the world; its public deficit is 17% of GDP. In the USA, the corona policy is catastrophic, and the deficit is approaching 20% of GDP. The number of unemployed is 40 million.
There will be no de-globalisation, but the high point of the globalisation of trade and investment is certainly over. Companies' will rethink their supply chains in order to avoid the risks of unilateral dependence on a single supplier. Reshoring' (i.e. the opposite of offshoring, which is the process of manufacturing goods overseas in order to try to reduce the cost of labor) has become a topical theme at the level of nations also in order to counter excessive dependence in strategic sectors. How can the Union protect itself against unfriendly takeovers and unfair competition? How can we better protect ourselves without falling into protectionism? The EU continues to believe in multilateralism, but it should not be the only one in the world to do so.
A EU draft proposal presented by Competition Commissioner Vestager on June 17 will see the. Commission crack down on foreign companies using "unfair" state subsidies to acquire EU firms. As part of the strategy to protect key EU industries and the single market. The document lists the aluminium, steel, microchip, shipbuilding and car industries as vulnerable sectors.
This slower globalisation will also have an impact on the economic model of a number of emerging countries that were heavily focused on export-led growth.
It is also true that the corona crisis has further weakened a continent like Africa, with all its consequences on the further impoverishment of the poorest part and on migration. Migration declined during the pandemic but may resume all the more strongly thereafter. Extreme poverty has risen by 150 million after decades of decline. The EU should continue to pursue its Africa policy also in its own interest.
Generally speaking, in the future, the world will have to deal even more with exogenous developments, such as climate change and pandemics. The devastating fires in Australia and the COVID-19 pandemic teach us that the exception is almost becoming the rule. Crises are not just endogenous, specific to our individual economic, political or societal systems. Disruptions are not just technological, like the digital revolution. Disruption exists on all levels. It will make our populations even more anxious and insecure. Vulnerable to reason after the traumas of the last few months or susceptible to emotions? Long term or short term? Stability or adventure? Solidarity or tribalism? How to prepare for new crises if there is no more solidarity in society and political courage at national and European among leaders?
Our future depends on the answer to those questions.
Herman Van Rompuy